Norges Bank has set the policy rate 13 times in two years. With a lending rate approaching 6 per cent, the interest rate screw is really starting to tighten for Norwegian home owners. Nine out of ten of us have floating mortgage rates. And there is little indication that there will be any major relief anytime soon. As it stands now, Norges Bank will probably raise interest rates for the last time in December, before there may be a cut well into next year. And by that I mean just that: One cut. Not even the following year, i.e. in 2025, do you find the huge cut plans in Norges Bank’s own forecasts. As it stands now, we will possibly get two cuts in 2025, before two further cuts in 2026. At the start of 2027, the key interest rate is likely to be 3.2 per cent – which means a mortgage interest rate of around 4.5 per cent. In other words, it will go down at a snail’s pace, compared to the rocket journey up. Highest wage growth ever The main reason is that price inflation is still high, because there are still heavy forces that help keep price pressure up. One of the heaviest forces is wage growth. A few weeks ago, we received figures for wage growth in the third quarter, which showed growth of 6.4 (!) percent. This is the highest wage growth ever in these statistics. Next year, wage growth is expected to be 5.2 per cent. Let me remind you that Norges Bank governs according to a target that price growth should be around 2 per cent over time. Getting price growth down to two at the same time as wage growth is above the five figures is, well, demanding. The numbers two and five are so far apart in an economic sense that we are talking many years before we reach our goal for several reasons: Cost-driven price growth: When companies pay higher wages, they have to increase the prices of goods and services to maintain their profits. This contributes to a general price increase in the economy. Even in industries where wage growth is not that high, increased prices in other industries can lead to general price increases, because companies have to pay more for inputs and services. Demand pressure: High wage growth can increase overall demand in the economy. With more money available, consumers can spend more, which increases the demand for goods and services and can drive up prices. Companies can also take advantage of this opportunity to raise prices. Expectations of inflation: If workers and businesses expect prices to continue to rise, this can become self-reinforcing. Workers will demand higher wages to compensate for the expected price increase, and businesses will continue to raise prices. If both consumers and producers expect higher prices, they will therefore behave in a way that actually contributes to higher prices. Strong LO criticism At the same time that Norges Bank has raised interest rates at a rapid pace, Norway’s largest workers’ organisation, LO, has strongly criticized the policy. They believe that Norges Bank is taking it too hard, and that what they call “the animal age” – is coming from abroad and that it cannot be fought by raising interest rates here at home. In addition, they believe that the “animal time” in itself is restrictive enough, and that the governor of the central bank, Ida Wolden Bache, does not recognize to a large enough extent that the Norwegian wage structure is organized so that price inflation is kept down. LO leader Peggy Hessen Følsvik at LO’s cartel conference last week. Photo: Terje Bendiksby / NTB Although LO believes that the first interest rate increases were necessary, they believe that the interest rate increases that came after Russia’s attack on Ukraine and the subsequent energy crisis – were wrong. Frustrated LO members The response from LO must be read in the context of the organisation’s around one million members now being hit by a demanding time for the private economy. LO leader Peggy Hessen Følsvik believes that it is her members who bear the cost of rising prices, interest rate increases – in addition to the fact that they have committed to being fairly moderate in wage settlements. The LO leader’s target thus causes a great deal of frustration among many. But LO’s conclusion, namely that interest rate increases are wrong, receives little support from economists outside LO. Many point to the obvious; lower interest rates would have resulted in an even weaker krone and even higher price growth. Hardly a dream situation for the Norwegian economy. Norges Bank is patient LO believes that Norges Bank should have been more patient and let wage formation work, but if you look at the bank’s own forecasts, they are indeed that. Not until the third quarter of 2025 do we think we will see double figures on price growth. That is two years away, and will give around five consecutive years of price growth well above the target. It seems quite patient. They could set the interest rate even higher and get price inflation down more quickly. Central bank governor Ida Wolden Bache met LO at the cartel conference. Photo: William Jobling / news LO also believes that Norges Bank does not take sufficient account of the labor market, or “highest possible employment” – and that they risk jobs being lost in the fight against inflation. So far, however, the labor market has been strong in the face of interest rate rises, which can also be read from the wage statistics. Again; Norges Bank could have set interest rates even higher – and let the labor market and the economy fall if inflation was the only thing they cared about. Last week, LO called for a “clearer mandate, so that Norges Bank comes to its senses”. The politicians have not opened up that discussion. Norges Bank’s mandate is clear enough: to ensure low and stable inflation over time. It is not so easy to spot a real conflict of goals between LO and Norges Bank. They want the same thing, namely a stable economy. It also provides the highest possible employment over time.
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Your wage growth can keep interest rates high – for a long time – Statement
